Bear and bull market has a huge impact on your portfolio

You may have heard of the term “bear and bull market” on mainstream media regarding investments. Bull and bear markets are a term used to refer to market conditions as to how investments are doing. Traditionally, it refers to the stock market, but now it can be applied to any other assets. It is important to understand the market conditions because it has a huge impact on your portfolio.

Hence, we will explore the “bear and bull” market in the following:

1. What is a bull and bear market?

A “Bull” is when the market is favourable for investors. The stock market price and company equities increase and bring good returns for investors. There is a strong demand in the stock market for shares and other securities but little supply. Most securities holders are not willing to sell to cash out their profits, leading to an increase in the price of shares. This is because investors have faith in the market that it will keep growing in the foreseeable future. Not only the market conditions are better, but also the overall economy of the state is doing significantly well, with high employment levels.

A bear market is the opposite, where equities lose their value and become more volatile. An example of a bear market was the 2008-09 market crash, where the housing bubble burst and led to the downfall of the housing market to a significantly low level. The demand for securities is lower and more investors are looking to sell. In such cases, most investors will lose faith in the market and will sell everything to save the last penny, eventually further driving down the market. 

With unemployment levels rising and people refrain from spending, the economy is also affected, impacting company equities negatively because they need consumer spending. 

For a market to be considered “bear”, the price must fall 20% or more.

2. Should you buy in a bear market?

The best course of action in a bull market is to buy stocks early to take advantage of their rising prices in the future by selling them at a profit. In a bear market, though, there could be an argument to buy stocks because the prices are lower. However, the chances of losses in the future are also greater because it is losing value continuously without showing any signs of recovering. Investors will have to lose more than they can tolerate before turning any profit. Most experts suggest investing instead in fixed-income securities

Absolute losses in a bear market are not conclusive, and investors can still benefit from a bear market by short selling and profiting from it. However, it must be done carefully, and the investor must be prepared to tolerate significant losses. 

3. Predictions for bear and bull market in 2021

Let us remind everyone once again - You cannot time the market! Yet, people keep looking for patterns where there are none and make decisions based on past performance, knowing that past performance is not an indicator of future performances.

But you can observe the market history to understand its nuances and what circumstances led to the outcome. Bulls do not run forever, and bears do not stay forever. The first thing to determine whether the market is bull or bear is its performance in the long term - whether the prices will rise or fall further. Not all market conditions determine themselves as bull or bear - sometimes, it is in the middle. This happens due to economic stagnation, and it produces no rise or fall in the market. 

Regardless, various research papers and media outlets have made their predictions for 2021 based on past research and came up with the following:

  • Demand for private equity investments in Europe looks strong because of its founder culture, consumer demand for European goods, and ease of business acquisition. It is expected to remain like that beyond 2021
  • Recovery funds from the government and the central banks are enabling support for small businesses in Europe to make them more resilient to economic crashes, greener and more digital
  • Europe has seen a bull market in 2021 with a 5% increase in the stock market, with the index increasing to 13%. Regional stocks will see an increase of 9.5% on average by the end of 2021
  • Basic resources, oil and gas, and financial equities will generate more returns

Bear and bull market has a huge impact on your portfolio, so you need to determine the current market before making any investment decision. The key factor, which you should keep in mind, is what is about to happen in the long term - will the prices increase or go down further? Either way, it depends on your risk tolerance. 

Last update: 06/08/2021

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